Back in the 'Seventies, The Clash sang of being torn between those unenviable alternatives, which aptly reflected the economic conundrum of the times. Growth was slowing but inflation was rising nonetheless -- a pretty punk combination.

The Federal Open Market Committee seems similarly betwixt and between, according to minutes of the policy-setting panel's March meeting released Wednesday. "The Committee agreed that further policy firming might prove necessary to foster lower inflation, but in light of the increased uncertainty about the outlook for both growth and inflation, the Committee also agreed that the statement should no long cite only the possibility of further firming."

That omission raised hopes in the market that the elimination of a future rate hikes was a prelude to an eventual cut -- an inference that was a stretch but one that was drawn anyway. Those expectations were disabused over the past couple of weeks, especially after the March employment report showing a stronger-than-expected rise in payrolls of 180,000 employees.

The FOMC's adamancy that inflation remains its top problem contrasted with its equanimity about the well-advertised problems in housing and subprime mortgages and the stunning weakness in capital spending. On the latter score, the policy makers pointed to all the positives for corporate investment: ample cash reserves, falling prices of high-tech capital goods and the hugely accommodative capital markets.

But the FOMC seemed puzzlingly complacent that businesses were unwilling to invest even under these salubrious conditions. Spending should eventually come around, and all will be well; anyway, that's their forecast and they're sticking to it.

Rather than spurring capital expansion, the extraordinarily easy credit conditions are funding financial activity. With the seemingly limitless credit that the market seems willing and able to extend, private-equity can take aim at the biggest game. Even a $50 billion target such as
Dow Chemical
apparently isn't out of range, if recent published reports can be believed.

So the FOMC faces inflation that's too high for comfort but growth with risks tilted to the downside despite easy credit conditions. So should they stay or should they go?

Probably neither. The federal-funds futures market doesn't see a quarter-point cut in the Fed's target rate as being better than an even-money bet until November. But the fed-funds futures field of vision doesn't reliably extend that far.

Still, the Treasury market has backed up sharply in the past couple of weeks as it became apparent the fed-funds rate was all but certain to stay at 5&frac14;% than go lower.

But the rise in bond yields -- to about 4.74% from 4.50% for the benchmark 10-year Treasury -- has presented investors a clear buying opportunity, contends Dresdner Kleinwort strategist Albert Edwards.

Stubbornly high U.S. inflation has preoccupied investors despite evidence of slippage in key economic indicators in recent months. Bond investors typically get nervous at this point in the cycle, he writes, latching onto lagging indicators that remain robust, such as inflation and employment. Meanwhile, they ignore evidence of weakness, notably the slippage in ISM Purchasing Managers' surveys of the manufacturing and service sectors, he adds.

"Our house view is for an economic bumpy landing with the risks of recession remaining high," Edwards concludes. "We expect the current inflation worries to evaporate as we move deeper into this slowdown. Divergences between the ISMs and implied inflation expectations tend to be resolved with a flip-flop in expectations. We believe this present an opportunity to overweight bonds when stock market profits are under pressure."

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.